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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
UK borrowing casts doubt on pre-election tax cut prospects
Analysts assert that government borrowing surpassing expectations has curtailed the potential for tax cuts before the upcoming elections.
The Office for National Statistics disclosed that government borrowing, representing the variance between spending and tax revenue, amounted to £120.7 billion in the fiscal year ending March.
Although lower than the preceding year, this exceeded the government's forecast by £6.6 billion.
Despite speculation about further tax reductions, such as the National Insurance cut in March, the unexpected borrowing and the possibility of larger government interest payments due to slower-than-anticipated decreases in interest rates could impede the government's ability to adhere to its self-imposed spending constraints.
The Office for Budget Responsibility (OBR) had anticipated borrowing for the year to be £114.1 billion. With a general election mandated before the conclusion of January 2025, there's anticipation that the government might endeavour to implement tax reductions later this year to influence voters.
The recent reduction in National Insurance by 2 pence in the pound during the spring Budget, following a similar reduction announced in last year's Autumn Statement, is indicative of this trend.
The OBR estimated that each reduction would cost the government nearly £10 billion. It's important to note that these figures represent initial estimates of public sector finances for the last fiscal year, and revisions are anticipated in the forthcoming months.
Borrowing in March alone amounted to £11.9 billion, which, although £4.7 billion less than the previous year, still exceeded analysts' expectations.
Total debt, representing the cumulative amount owed by the government over the years, stood at £2.7 trillion at the end of March. According to the ONS, this is equivalent to 98.3% of the UK's GDP, remaining at levels last observed in the early 1960s.
Japan government keeps view that economy is in moderate recovery
For the second consecutive month, Japan reiterated on Tuesday that the economy is experiencing a moderate recovery, despite signs of potential slowdown.
This reaffirmation underscores concerns regarding the fragility of private consumption, which constitutes more than half of the economy and serves as a critical factor for overall growth.
The monthly economic report released by the Cabinet Office followed a series of tepid economic indicators, indicating that any departure from the low growth witnessed late last year would likely be gradual, given the limited momentum in both external and domestic demand.
While the report maintained its overall assessment unchanged, including each component, it noted a positive trend in corporate perspectives on business conditions. However, this improvement is tempered by disruptions caused by certain automakers suspending output and shipments.
Rather than viewing the temporary pause in factory activities as the primary concern, analysts are pointing to the persistent weakness in private consumption, which poses challenges for the Bank of Japan.
Last month, the central bank discontinued negative interest rates in anticipation of a cycle of wage increases and sustained inflation.
Anticipated to maintain its current stance, the central bank is set to conclude its two-day policy review by Friday, during which it will provide updated GDP and inflation forecasts while assessing the ramifications of a weaker yen.
Analysts suggest that Japanese policymakers may be on the brink of intervening in the foreign exchange market to support the yen.
Further depreciation of the yen could strain households by elevating import costs. On Tuesday, the yen was trading within the upper range of 154-155 to the dollar, a level not witnessed since the bubble era of the 1990s.
IMF upgrades 2024 forecast
The IMF has revised its global economic growth forecast for this year to 3.2 percent, which is 0.1 percentage points higher than its January projection, as per its recently published World Economic Outlook (WEO) report.
While the report indicates reduced economic scarring from the crises of the past four years, the IMF highlighted that low-income developing countries may face more significant challenges. Many are still grappling with the aftermath of the pandemic and cost-of-living crisis, requiring decisive actions to address.
However, the WEO report also presents a sobering outlook for global growth five years ahead, estimating it at 3.1 percent, the lowest in decades.
The IMF anticipates a decline in global headline inflation from an annual average of 6.8 percent in 2023 to 5.9 percent in 2024 and further to 4.5 percent in 2025. Advanced economies are expected to return to their inflation targets sooner than emerging markets and developing economies.
The IMF noted recent increases in oil prices, partly attributed to geopolitical tensions, and highlighted persistent high services inflation.
The report outlined several downside risks, including potential price spikes from geopolitical tensions such as those arising from the Ukraine crisis and the Gaza-Israel conflict. These, along with ongoing core inflation and tight labour markets, could lead to increased interest rate expectations and asset price reductions.
Moreover, the report warned of a divergence in disinflation speeds among major economies, which could trigger currency fluctuations and put pressure on financial sectors.
High interest rates may also have more significant cooling effects than anticipated, especially as fixed-rate mortgages reset and households face high debt levels, potentially causing financial strain.
